PERPETUAL WEALTH (HONG KONG) LTD v. BE SOLUTIONS CO LTD AND OTHERS

HCCT 42/2021

[2022] HKCFI 888

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 42 OF 2021

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DECISION

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1.  This is the application by the plaintiff (“P”) against the counterclaiming 1^st defendant (“D1”) for security for costs pursuant to section 905 of the Companies Ordinance, Cap 622 (“CO”).

2.  The application was originally set down for hearing before me on 7 March 2022.  Because of the pandemic, and having sought parties’ views, I on 1 March 2022 directed that the application be disposed of on the papers.  I at the same times gave directions on the lodging of hearing bundle and written submissions.  Pursuant to those directions, Mr Earl Deng on behalf of P lodged his submissions in support and reply respectively on 2 and 9 March 2022 (“P/Sub1” and “P/Sub2”).  Mr Lai Chun Ho on behalf of D1 lodged on 7 March 2022 his submissions in opposition (“D1/Sub”).

3.  I have considered all the documents, submissions and authorities that have been placed before me.  Below is my decision.

The evidence

4.  Before me are the following affirmations:

(a)  On P’s behalf:

(i)  the 3^rd and 4^th affirmations of Lee Man Hon (“Lee”, and “Lee/aff3” and “Lee/aff4”).  Lee is and Administrative Officer of P; 

(ii)  the affirmation of Tsang Wai Hung (“Tsang”, and “Tsang/aff”). Tsang is a clerk to Messrs Stevenson, Wong & Co, solicitors for P (“SW”); and

(b)  On D1’s behalf, the 2^nd affirmation of Yu Pui Sze (“Yu” or “D2” as appropriate, and “Yu/aff2”).  At the material time, Yu was the sole director and shareholder of D1.  In Yu/aff2, Yu says that she is the General Manager of D1.  The 3^rd defendant (“D3”) is her husband and an employee of D1.

Parties’ primary stances

5.  In gist, P says that there is credible testimony showing reason to believe that D1 will be unable to pay P’s costs if it succeeds in the defence of D1’s Counterclaim (the “Counterclaim”).  It further says that whilst D1 is a defendant to P’s claim, at least in some aspects of its Counterclaim, D1 is the attacker (in the context of what Mr Deng calls the Crabtree Principle).

6.  D1 on the other hand says that its Counterclaim arises out of the same matter as P’s claim.  As such, it should not be ordered to provide security for costs.  In any event, P has provided no adequate evidence that D1 will be unable to pay P’s costs.  Further, the quantum P claims is vague and overly exaggerated.

Parties’ pleaded cases

7.  The current set of pleadings comprise principally (1) P’s Re-amended Statement of Claim (“SoC”), (2) Amended Defence and Counterclaim of D1 and Defence of D2 and D3 (“D&CC/D1”), (3) Amended Defence of D2 and D3 (“Def/D2&D3”), and (4) Re-amended Reply and Defence to Counterclaim of D1 (“Reply” or “R&D” as appropriate).

8.  The action concerns certain agreements reached in about September/October 2017 (the “Agreements”) whereby P engaged D1 to carry out decoration works at P’s registered office (the “Property”).  The works included the use and installation of marble of certain descriptions and qualities (the “Marbles”).  As things turned out, such Marbles are the focal point of the parties’ disputes.

9.  P’s pleaded case may be summarized as follows:

(a)  Ds had made to it 3 sets of misrepresentations (the “Misrepresentations”). They concerned principally the grading, origin and quality of the Marbles, or why they did not correspond to the samples previously inspected (the “Samples”). P says that it had been induced thereby to enter into the Agreements, or at least certain parts thereof;

(b)  The Marbles subsequently used and supplied were defective, and were of grade and quality lower than those of the Samples;

(c)  Without knowing the problems, P had paid D1 HK$11,835,196.25, leaving an outstanding sum of HK$2,360,939.75;

(d)  P has pleaded five causes of action:

(i)     Breach of the Agreements, in that D1 had provided Marbles of inferior quality, which did not correspond with the Samples in terms of origin, type and grade, were not of merchantable quality, and were of poor workmanship.  As a result of those breaches, D1 had repudiated the Agreements which repudiation P had accepted.  D1 had failed to complete the works.  A third party was engaged to rectify the problems, the total costs for which is particularized at HK$9,422,798;

(ii)    Reduction of contract sums due to downward adjustment of certain contractual works, the total amount of which is particularized at HK$1,587,000;

(iii)   Fraudulent misrepresentation;

(iv)   The tort of deceit, in the sense that the Representations made by D1 through D3 were false, or the defendants being reckless as to their truth, the Misrepresentations being intended to be relied upon, thereby amounting to tortious deceit against P, and

(v)    Conspiracy between the defendants to defraud and/or injure by unlawful means;

(e)  P claims against all defendants damages.

10.  D1’s case may be summarized as follows:

(a)  In respect of its defence:

(i)     It denies any breach of the Agreements, and in particular:

(1)  Differences in colour and pattern inevitably exist in the natural form of marbles.  The choice of the Marbles was a matter for D1, the quality of which D1 could not and did not warrant.  D1 had ordered the same quality of marble as specified in the Agreements.  P had further inspected the Marbles on multiple occasions;

(2)  D1 did not repudiate the Agreements.  It was P which did.  P had agreed to grant an extension of time for D1 to carry out remedial works (the “Extension”). P unilaterally terminated the Agreements before the agreed extended deadline and asked D1’s staff to leave the Property while they were in the course of carrying out remedial works[1] (“P’s Early Unilateral Termination”);

(ii)    The alleged loss and damage arising out of the alleged downward adjustment are not admitted, and P is put to strict proof of the same;

(iii)   In respect of misrepresentation, fundamentally D1 denies the Misrepresentations having been made.  Falsity and other elements of the cause of action as particularized have also been denied;

(iv)   Deceit, including falsity, knowledge and intention, are all denied; and

(v)    Conspiracy is denied. 

(b)  In respect of its Counterclaim:

(i)     D1 repeats its defence^[2];

(ii)    It avers that it has fully discharged its obligations under the Agreements in that[3]:

(1)  it has carried out the works in accordance with the terms of the Agreements;

(2)  it was ready, willing and able to carry out the remedial works, and was in the course of doing so until P’s Early Unilateral Termination when P ordered D1’s staff to leave the Property;

(iii)   Outstanding payment in the total sum of HK$2,300,769.75 remains payable by P[4], which D1 counterclaims.  

11.  In P’s R&D, and relevantly:

(a)  P denies any Extension[5];

(b)  In respect of the Counterclaim, P:

(i)     repeats the SoC and the Reply and deny D1’s Counterclaim[6];

(ii)    pleads alternatively a set-off[7].

Whether credible testimony that D1 will be unable to pay P’s costs

12.  Section 905(1) of the CO provides as follows:

“(1) This section applies where—

(a) a company is a plaintiff in an action or other legal proceedings; and

(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.”

13.  When considering P’s application here, I need to consider first of all whether the threshold under s 905(1)(a) of CO has been met.  If not, all other considerations will not be engaged.

14.  According to Lee/aff3, Tsang/aff and the documents they produced:

(a)  D1 was incorporated in February 2017, not long before the time when the Agreements were reached;

(b)  Its paid up capital is HK$1;

(c)  Its registered address is 1^st Floor, Winner Mansion, 691A Nathan Road, Mongkok, Kowloon, Hong Kong.  Land search records however do not reveal any 691A Nathan Road.  Winner Mansion is on 691 Nathan Road, and the 1^st Floor of which is registered in the name of Chow Sang Sang Property Holdings (BVI) Ltd.;

(d)  Tsang visited the 1^st Floor of 691 Nathan Road (the “Address”) twice:

(i)     He found three office units there;

(ii)    Two of them were occupied by entities which had no apparent connection with D1;

(iii)   The door of the other unit (the “Unit”) had an address plaque of “1/F, Winner Mansion, 691A Nathan Rd.” on it, and a directory of a list of companies.  D1’s name was not on it;

(iv)   Tsang pressed the doorbell of the Unit during his first visit.  No one answered the door.  He could notice no activity at the Unit;

(v)    During his 2^nd visit, he found a Ms Wong at the reception.  She said that she could receive letters for D1, but that she was not an employee of D1.  She otherwise refused to provide any useful information on D1.  She also did not know whether there was any staff member or representative of D1 there;

(e)  The Unit is clearly, at best, only the office of a secretariat company;

(f)  There is no dispute that D2 was at the time material to this action the sole director and shareholder of D1[8]. According to the company records, D2 ceased to be a director of D1 on 5 September 2020 when Wong Lai Ping was appointed.  According to Def/D2&D3[9], D2 has also ceased to be a shareholder of D1 since 14 October 2020;

(g)  P and the defendants were engaged in mediation during the period when D1’s changes in directorship and shareholding occurred.  Ds failed to notify P of those changes;

(h)  Despite the above, which have all been raised in Lee/aff3 and Tsang/aff, Yu has chosen not to deal with them in Yu/aff2.  No affirmation has been adduced from Wong Lai Ping.

15.  I have considered the submissions made by Mr Lai at §26 of D1/Sub.  I have considered the authorities cited therein in support of his submission that s 905(1)(a) of CO has not been satisfied.  On the other hand, Mr Lai has fairly accepted, with reference to the following paragraphs from Hong Kong Civil Procedure 2022at §23/3/14, that the requirement under s 905(1)(a) “may be prima facie satisfied as a result of” the number of factors set out therein, that:

“… The court may accept there is a prima facie case that the threshold under s.905 has been met as a result of the following factors: (1) the plaintiff is a shelf company with a nominal amount of paid-up capital; (2) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (3) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (4) the plaintiff company, other than entering into the transaction as stated in sub- para.(2) does not ordinarily carry on business …”

16.  I have considered Mr Lai’s submissions that D1 has received substantial sums from P.  Those sums were paid according to the SoC[10] between October 2017 and June 2018.  I accept Mr Deng’s submissions in this regard[11], on the strength of Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd [2003] 1 HKLRD 600 at §24 per Ma J (as the ex-Chief Justice then was), that the reference point when considering the threshold under s 905(1)(a) of CO is the time of the application.

17.  On the evidence before me, I am satisfied that the threshold under s 905(1)(a) of CO has been met.

D1 being a defendant

18.  The main issue in the present application is, with the nature of P’s claim and D1’s Counterclaim taken into account, whether security for costs should be ordered against D1 as the counterclaiming defendant.

19.  There can be no dispute that as a matter of law, no security for costs can be ordered against a non-counterclaiming defendant, whether under s 905 of CO or Order 23 of the Rules of the High Court.  A non-counterclaiming defendant does not choose to be sued, and ought not to be ordered to pay security before being permitted to defend himself.

20.  Equally, there can be no dispute that the court has jurisdiction to and may in the exercise of its discretion order security for costs against a counterclaiming defendant, either under s 905 of CO or Order 23 of the Rules of the High Court, depending upon what that counterclaiming defendant is.

21.  The nature of the counterclaim is material when considering an application for security.  This is so whether the application is one by a counterclaiming defendant against the plaintiff, or by the plaintiff against a counterclaiming defendant.

22.  In the present application, we are not concerned with the position of a counterclaiming defendant applying against the plaintiff, though the considerations often intertwine.

23.  BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd(1990) 59 BLR 43 was a case of a counterclaiming defendant seeking security from the plaintiff.  The application was refused on appeal, on the basis that the defendant had raised a counterclaim that litigated the same issues as raised by the plaintiff, so that those same issues would still have to be litigated in any event.  As submitted by Mr Lai, Crabtree and its rationale have been recognised and applied widely in Hong Kong – see Success Wise Ltd v Dynamic (BVI) Ltd[2006] 1 HKC 149 at §12 per Recorder B Yu SC, Brand Farrar Buxbaumat §26 per Ma J (as the ex-Chief Justice then was), Arko Ship Leasing Ltd v Winsmart International Shipping Ltd, HCAJ 213/2009 (unrep., 23 December2013) at §17 per G Lam J (as G Lam JA then was), which cases I have considered.

24.  Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307 was a case of the plaintiff seeking security against a counterclaiming defendant.  Both Dillon L.J.[12] and Bingham L.J.[13] were of the view that an order for security against a counterclaiming defendant is not precluded simply because the counterclaim arises out of the same transaction as the claim.  The question, as framed by Dillon L.J.[14]:

“is whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.”

The further elucidations by Bingham L.J.[15] are enlightening, that:

“The trend of authority makes it plain that, even though a counterclaiming defendant may technically be ordered to give security for the costs of a plaintiff against whom he counterclaims, such an order should not ordinarily be made if all the defendant is doing, in substance, is to defend himself. Such an approach is consistent with the general rule that security may not be ordered against a defendant. So the question may arise, as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?”

With the correct question in mind, Dillon L.J. looked at the nature of the counterclaim.  He concluded[16] that it bore every hallmark of the view that attack is at least the best form of defence.  The counterclaim was not in substance put forward as a defence to the claim, but were in truth a cross-action which went beyond operating as a mere defence.  The counterclaiming defendant was ordered to pay security.  Bingham L.J. was of the same view, that[17] (with emphasis added):

“It is, in my judgment, significant that the defendants here, in addition to pleading a very full defence, have pleaded an extensive counterclaim in which the damages claimed appear to exceed by a very substantial margin the damages claimed by the plaintiffs, in which additional substantial claims for malicious falsehood are made and in which the ambit of the action is very substantially enlarged. Like the deputy master, I have formed the view that the defendants here have clearly crossed the boundary which divides an aggressive defence from an independent counterclaim. That, of course, still leaves the discretionaryquestion as to what is the fair order to make. To my mind, it is significantthat the counterclaim raises far-reaching issues necessarily expensive and timeconsuming to explore. If the defendants' counterclaim fails, it is very doubtfulif the defendants can pay the plaintiffs’ costs of exploring those new issues, andit seems to me just and equitable that the plaintiffs should be secured againstthose costs in the event that they are successful in defeating the counterclaim.”

25.  Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213 was a case of a counterclaiming defendant seeking security against a plaintiff who was a Mainland resident.  Yam J summarized the applicable principles at §22.  Relevantly, at §22(h), and citing Bingham L.J. in Hutchison, Yam J observed that a defendant should not be required to give security for costs if he is only defending himself from the plaintiff's claim.

26.  Both Mr Lai and Mr Deng have made reference to 1^st Management Consultants Ltd v Mulpha (Hong Kong) Ltd[1987] 2 HKC 560.  I do not find that case, which on the face of the report appears to be one on further and better particulars, to be of much assistance to either side.  In any event, I do not believe that the test[18] which Liu J observed to be useful was meant to be one of general application.

27.  Mr Deng has referred to TC Developments (South East) Ltd and Another v Investin Quay House Ltd [2019] Costs LR 765 at §35.  That was a case of a plaintiff seeking security against a counterclaiming defendant.  Stuart-Smith Jfollowed and applied Hutchison. The summary of the applicable propositions at §22 is useful.  But Stuart-Smith J was not posing any new test when he asked whether the counterclaiming defendant is “launching a cross-claim with an independent vitality of its own”[19], as Mr Deng is apparently suggesting.  The learned judge there was only adopting the language of Bingham L.J. in Hutchison.

28.  So, in raising the Counterclaim, is D1 in substance defending itself, or is it raising a cross-claim with an independent vitality of its own?

29.  I have set out the nature of the parties’ cases above.  Mr Deng acknowledges that there are aspects of D1’s case which address P’s case directly.  It is not the attacker there.  What Mr Deng focuses upon is D1’s pleading and reliance upon the Extension, that certain defects could be remedied, which remedial works D1’s staff was doing, when P itself was guilty of P’s Early Unilateral Termination.  Mr Deng highlights further the point that D1’s case in those regards have resulted in leave having been granted for expert evidence to be adduced, primarily on the nature of some of the defects and whether they could be rectified.  

30.  I have considered parties’ pleaded case in substance.  I do not dwell upon formality or pleading.  D1 has denied all 5 causes of action pleaded by P.  In respect of the cause of action of breach of contract, and relevantly, it denies that it has committed any breach, and denies that it was the one which repudiated the Agreements.  It raises the positive defences of Extension and P’s Early Unilateral Termination.  They are on the face of pleading legitimate defences.  They flow from the same set of facts and transactions.  The circumstances in which P demanded D1 and its staff to leave the Property, whether D1 had repudiated the Agreements, and whether P was entitled to accept any repudiation, are some of the factual and legal issues which will need to be considered in any event even as part of P’s case. The defences do not enlarge the ambit of the action in any material or substantial way.  Whilst some additional evidence might become necessary, any additional factual issues they raise are discreet ones, and are not expensive or time-consuming to investigate.  They may not even be regarded as aggressive defences[20]. The Counterclaim then just flows from them.  As Mr Lai has submitted[21] which I agree, the Counterclaim may be looked at as the flip-side of P’s claim – if D1’s defences are established, it naturally flows that D1 is entitled to claim outstanding payments under the Agreements.  This is particularly so given P’s acceptance that, but for the alleged breaches and other claims by P against D1, P had in fact paid D1 short under the Agreements by HK$2,360,939.75.  I also note that the amount of the Counterclaim is much smaller than the amount of P’s claim, and is smaller even than what otherwise would according to P’s pleaded case be the outstanding amount which P should be required to pay D1.

31.  I have considered Mr Deng’s further submissions on the further facts pleaded at §§4 and 5 of the D&CC/D1, which Mr Deng describes as irrelevant.  In my view, those are background facts which form part of D1’s defence, and do not take P’s present application any further.

32.  In all the circumstances, I am of the view that in raising the Counterclaim, D1 is merely defending itself against P’s claim, has not raised any independent cross-claim, has not increased the ambit of P’s claim in any material or substantial way, and has not crossed the line which makes D1 liable or susceptible to any adverse security order.

Other considerations

33.  Given the discussion and considerations above, I do not believe it is necessary for me to consider the merits of the parties’ case.  If necessary, I would decline to accept Mr Deng’s submission that D1’s Counterclaim has low prospects of success.  As I have observed above, the positive defences of Extension and P’s Early Unilateral Termination are on the face of pleading legitimate ones.  Whether P can avail itself of the defence of set-off is of course dependent upon whether it can establish its claims.  In respect of both P’s case and D1’s Counterclaim, I am not able at this stage to assess in any high degree of probability of success or failure[22].

34.  I have not lost sight of the bottom line that the present application engages this Court’s discretion, which this Court needs to exercise having regard to all the circumstances of the case and the overall justice of the matter.  It involves a balancing exercise.

35.  On the facts of the case, and given the discussion above, and in particular my view that D1 has not raised any independent counterclaim but has only been defending itself against P’s claim, I see no facts or factors which would justify this Court in exercising its discretion in favor of granting the application.  Quite the contrary, to do so would in my view be highly unfair to D1, tantamount to requiring it to make security before being permitted to exercise its right defend itself.

36.  Given the above, any issue in relation to quantum is not engage.

Disposition

37.  For the reasons set out above, I refuse P’s application for security for costs against D1 as the counterclaiming defendant.

38.  I make a costs order nisi that D1 shall have the costs of the application, with certificate for counsel.  All costs are to be summarily assessed on the papers, and for that D1 may file and serve its Statement of Costs within 14 days from the date hereof, P to file and serve its Statement of Objections within 14 days thereafter, and D1 to file and serve its reply within 7 days.

39.  This Court is grateful to counsel for their assistance.